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Zions Bancorporation Reports First Quarter 2017 Financial Results

Apr 24 2017 at 02:00 PM

SALT LAKE CITY, April 24, 2017 – Zions Bancorporation ("Zions" or "the Company") today reported net earnings applicable to common shareholders for the first quarter of 2017 of $129 million, or $0.61 per diluted common share, compared to net earnings applicable to common shareholders of $125 million, or $0.60 per diluted common share, for the fourth quarter of 2016 and net earnings applicable to common shareholders of $79 million, or $0.38 per diluted common share, for the first quarter of 2016.

First Quarter 2017 Highlights

Net Interest Income and Net Interest Margin

Net interest income was $489 million, up 2% from 4Q16 and up 8% from 1Q16

NIM was 3.38% compared with 3.37% in 4Q16 and 3.35% in 1Q16

Operating Performance

Pre-provision net revenue ("PPNR") was $215 million, up 1% from 4Q16 and up 20% from 1Q16

Adjusted PPNR was $213 million, down 2% from 4Q16 and up 17% from 1Q16

Noninterest expense was $414 million, compared with $404 million in 4Q16

Adjusted noninterest expense² was $411 million, compared with $395 million in 4Q16

Efficiency ratio was 65.9%, compared with 64.5% for 4Q16

Loans and Credit Quality

Net loans and leases were $42.7 billion, compared with $42.6 billion for 4Q16

Provision for credit losses was $18 million, compared with less than $1 million in 4Q16

Net charge-offs were $46 million, compared with $27 million in 4Q16

Oil and Gas-Related Exposure

Net charge-offs for oil and gas loans were $14 million, compared with $16 million in 4Q16

Oil and gas allowance for credit losses continued to exceed 8% of the portfolio

38% of oil and gas-related loans were criticized for both 1Q17 and 4Q16

Capital Return

Tangible return on average tangible common equity was 8.8%, compared with 8.4% in 4Q16 and 5.6% in 1Q16

Common stock repurchases of $45 million during the quarter

Income Taxes

The tax rate of 24.5% in 1Q17 was lower due to a one-time adjustment and the adoption of new stock-based compensation accounting guidance

CEO Commentary

Harris H. Simmons, Chairman and CEO, commented, “While we are pleased with the strong 61% improvement in earnings per share over the same period a year ago, results relative to the fourth quarter of 2016 were muted due to lackluster loan growth, a condition which has recently been prevalent throughout the industry. Although we experienced a single loan loss that comprised nearly two-thirds of total net chargeoffs during the quarter, credit quality was generally strong and improving, with classified loan totals improving by 7% relative to fourth quarter results.” Mr. Simmons concluded, “While operating costs were seasonally higher, we remain committed to a continued focus on expense control and improvement in our profitability through the remainder of 2017 and beyond.”

Net Interest Income

Net interest income increased to $489 million in the first quarter of 2017 from $480 million in the fourth quarter of 2016. The increase in net interest income was due to a $19 million increase in interest from investment securities. Average securities increased in the first quarter of 2017 by $2.5 billion as the Company continued to reposition the balance sheet and moderately reduce its interest rate sensitivity. The Company expects to maintain its securities portfolio at approximately the current level in the near term. Average loans were relatively stable during the first quarter of 2017, and the yield on the loan portfolio increased 3 basis points to 4.14% during the quarter. However, an increase in nonaccrual loans, a decrease in prepayments, and a decline in the revenue from loans purchased from the FDIC in 2009 muted some of the natural asset sensitivity of the Company. These factors, and two fewer days in the quarter, resulted in a $5 million decrease in interest and fees on loans in the first quarter of 2017.

The net interest margin increased slightly to 3.38% in the first quarter of 2017, compared with 3.37% in the fourth quarter of 2016. The increase in net interest margin was driven by increased yields on the loans and securities portfolios, up 3 and 20 basis points from the prior quarter, respectively, but was tempered somewhat due to the continued shift to a greater concentration of securities as a percentage of earning assets and lower marginal net yields on balance sheet growth.

Noninterest Income

Total noninterest income for the first quarter of 2017 was $132 million, compared with $128 million for the fourth quarter of 2016. The increase in total noninterest income during the quarter was driven by an $8 million increase in net securities gains and an $8 million increase in dividends and other investment income, primarily due to increased market values of the Company’s Small Business Investment Company (“SBIC”) investments. These gains were partially offset by a $9 million decline in other noninterest income, driven by a $7 million decline in fair value and nonhedge derivative income resulting from fair value adjustments.

Customer-related fees decreased by $3 million in the first quarter of 2017 compared with the prior quarter, which was primarily due to a decline in lending activity, partially offset by an increase in credit card and interchange fees. Customer-related fees increased by $3 million compared with the first quarter of 2016, primarily due to increased wealth management income.

Noninterest Expense

Noninterest expense for the first quarter of 2017 was $414 million, compared with $404 million for the fourth quarter of 2016, and $396 million for the first quarter of 2016. The increase in total noninterest expense from the fourth quarter of 2016 was driven by a $21 million increase in salaries and employee benefits, partially offset by an $8 million decline in the provision for unfunded lending commitments. The change in salaries and employee benefits during the first quarter was due to a $4 million increase in severance and the following seasonal increases:

$7 million in stock-based compensation related to equity grants to retirement-eligible employees

$6 million in payroll taxes

$4 million related to the Company’s contribution to the employee 401(k) plan

These increases in salaries and employee benefits were partially offset by a $3 million reduction in salary expense, primarily related to loan originations. This was the result of an update in the estimation process associated with the consolidation of loan operations.

The Company is committed to its expense and efficiency ratio goals for 2017, which are to hold adjusted noninterest expense growth to 2-3% in 2017, and to achieve an efficiency ratio in the low 60s. For information on non-GAAP measures see pages 16-18.

Income Taxes

The tax rate of 24.5% as of March 31, 2017 was lower than the 33.8% tax rate at December 31, 2016. The reduction in tax rate was primarily driven by a one-time $14 million benefit to tax expense related to state tax adjustments, and a $4 million benefit from the implementation of new accounting guidance related to stock-based compensation. Excluding these items, the Company expects the tax rate for the rest of 2017 to be approximately 34% to 35%.

Asset Quality

Asset quality for the total portfolio remained strong and was generally stable when compared with the prior quarter. Classified loans for the total portfolio decreased to $1.5 billion at March 31, 2017, from $1.6 billion at December 31, 2016. Nonperforming assets were $588 million at March 31, 2017, compared with $573 million at December 31, 2016. The ratio of nonperforming assets to loans and leases and other real estate owned remained relatively stable at 1.37% at March 31, 2017, compared with 1.34% at December 31, 2016. Total net charge-offs were $46 million in the first quarter of 2017, or an annualized 0.43% of average loans, compared with $27 million, or an annualized 0.25% of average loans, in the fourth quarter of 2016. Nearly two-thirds of the total net charge-offs in the first quarter of 2017 were related to an isolated event with one non oil and gas-related borrower, who is subject to a government investigation and seizure of assets. Additionally, $14 million of net charge-offs were related to the oil and gas-related portfolio.

The Company provided $18 million for credit losses during the first quarter of 2017, compared with less than $1 million during the fourth quarter of 2016. The increase in the provision for credit losses was primarily due to the isolated charge-off discussed previously, partially offset by a decrease in the provision related to the oil and gas portfolio. The allowance for credit losses decreased to $604 million at March 31, 2017 from $632 million at December 31, 2016, which was 1.41% and 1.48% of loans and leases, respectively. The allowance for credit losses decreased as a result of credit quality improvement in the total portfolio. The reserve for unfunded lending commitments decreased by $5 million as a result of credit quality improvement in the oil and gas-related portfolio.

Loans and Leases

Loans and leases, net of unearned income and fees, were $42.7 billion at March 31, 2017, compared with $42.6 billion at December 31, 2016. During the first quarter of 2017, consumer loans increased $287 million, predominately in 1-4 family residential loans, which includes the purchase of $166 million of loans. This increase was slightly offset by a $97 million decline in the oil and gas-related portfolio, primarily due to active management of the portfolio, including payoffs, paydowns and charge-offs. Excluding the reduction in oil and gas-related loans, net loans and leases increased $190 million during the first quarter of 2017. Unfunded lending commitments were $19.4 billion at March 31, 2017, compared with $19.3 billion at December 31, 2016.

Oil and Gas-Related Exposure

Oil and gas-related loans represent 5% of the total loan portfolio. Unfunded lending commitments increased by $164 million during the first quarter of 2017, primarily in the midstream portfolio. Criticized oil and gas-related loans decreased $32 million, or 4%, during the first quarter of 2017, mainly due to payoffs and paydowns. Oil and gas-related loan net charge-offs were $14 million in the first quarter of 2017, compared with $16 million in the fourth quarter of 2016, and were predominantly in the upstream portfolio. The allowance for credit losses related to oil and gas-related loans continued to exceed 8% at the end of the first quarter of 2017.

Deposits

Total deposits increased to $53.5 billion at March 31, 2017, compared with $53.2 billion at December 31, 2016, as a result of a temporary increase in client activity at quarter-end. Average total deposits were $52.2 billion for both the first quarter of 2017 and the fourth quarter of 2016. Average noninterest bearing deposits decreased slightly to $23.5 billion for the first quarter of 2017, compared with $23.6 billion for the fourth quarter of 2016, and were 45% of average total deposits.

Long-term Debt and Shareholders' Equity

During the first quarter of 2017, the Company continued its stock buyback program and repurchased $45 million of common stock during the quarter at an average price of $42.43 per share, and has repurchased $135 million of common stock since July 1, 2016 at an average price of $34.18 per share, leaving $45 million of buyback capacity remaining in the 2016 capital plan (which spans the timeframe of July 2016 to June 2017). Despite the share repurchases, the increase in the average market price per share of common stock for the first quarter, compared with the fourth quarter, increased the weighted average diluted shares by 5.0 million due to warrants that have been outstanding since 2008 (“TARP” warrants - NASDAQ: ZIONZ) and 2010 (NASDAQ: ZIONW).

Preferred dividends are expected to be $12.4 million for the second quarter of 2017. Our preferred stock may be reduced if we redeem $144 million of preferred equity in the second quarter of 2017, as outlined by our 2016 capital plan. Additionally, the Company reduced its long-term debt by $152 million during the first quarter of 2017 due to the maturity of 4.50% senior notes.

Tangible book value per common share increased to $29.61 at March 31, 2017, compared with $29.06 at December 31, 2016. The estimated Basel III common equity tier 1 (“CET1”) capital ratio was 12.2% at March 31, 2017 compared with 12.1% at December 31, 2016; Basel III capital ratios are based on the applicable phase-in periods, however, the fully phased-in ratio is not substantially different. For information on non-GAAP measures see pages 16-18.

Supplemental Presentation and Conference Call

Zions has posted a supplemental presentation to its website, which will be used to discuss these first quarter results at 5:30 p.m. ET this afternoon (April 24, 2017). Media representatives, analysts, investors, and the public are invited to join this discussion by calling 253-237-1247 (domestic and international) and entering the passcode 91430582, or via on-demand webcast. A link to the webcast will be available on the Zions Bancorporation website at zionsbancorp.com. The webcast of the conference call will also be archived and available for 30 days.

About Zions Bancorporation

Zions Bancorporation is one of the nation's premier financial services companies with total assets exceeding $65 billion. Zions operates under local management teams and distinct brands in 11 western states: Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington and Wyoming. The company is a national leader in Small Business Administration lending and public finance advisory services, and is a consistent top recipient of Greenwich Excellence awards in banking. In addition, Zions is included in the S&P 500 and NASDAQ Financial 100 indices. Investor information and links to local banking brands can be accessed at zionsbancorp.com.

Forward-Looking Information

Statements in this press release that are based on other than historical data or that express the Company’s expectations regarding future events or determinations are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements based on historical data are not intended and should not be understood to indicate the Company’s expectations regarding future events. Forward-looking statements provide current expectations or forecasts or intentions regarding future events or determinations. These forward-looking statements are not guarantees of future performance or determinations, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties, and actual results may differ materially from those presented, either expressed or implied, in this press release. Factors that could cause actual results to differ materially from those expressed in the forward-looking statements include the actual amount and duration of declines in the price of oil and gas, our ability to meet our efficiency and noninterest expense goals, as well as other factors discussed in the Company’s most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission (“SEC”) and available at the SEC’s Internet site (http://www.sec.gov).

Except as required by law, the Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.